UPSC PRELIMS · ECONOMICS · EXCHANGE RATES: NEER AND REER

With reference to the Indian economy, consider the following statements: 1. An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee. 2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness. 3. An increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER. Which of the above statements are correct?

Take a breath. Choose one. Press A–D on your keyboard if you like.

EXPLANATION

A rise in NEER indicates rupee appreciation; a rise in REER does not necessarily mean improved competitiveness, while relative inflation can create divergence between NEER and REER.

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